In his book How to Trade in Stocks (1940), Jesse Livermore describes a concept that eventually became known as a shakeout + 3 when described by William O’Neil in his book How to Make Money in Stocks.
Jesse’s idea was simple, after a shakeout to a low, if there is another shakeout that undercuts the previous low, the buy price becomes the previous low price plus 10% of that low. Jesse referred to this as a pivotal point.
The “+ 3” aspect came about as O’Neil’s example was based on a stock that was $30/share, hence, 10% of $30 is $3, so it was known as a shakeout + $3.
Calculating Shakeout + 3 Early Entry
On November 3rd, 2020 AMD setup a potential shakeout + 3 early entry. It starts with a recent low undercutting a previous low:
Using the two lows shown above, here are the steps to calculate a shakeout + 3 entry point:
Step #1 - Get two recent low values:
Original low: $73.85
Undercut low: 73.76
Step #2: Calculate prices at 5% and 10% of original low:
5% of $73.85 = $3.70
10% of $73.85 = $7.40
Step #3 - Calculate early entry range:
The range is the original low plus the 5% and 10% values from above:
Range = $77.55 ($73.85 + $3.70) to $81.25 ($73.85 + $7.40)
Step #4 - Look for an area of resistance:
As with the range, an area of resistance was not part of the original concept described by Livermore or O’Neil. Using prior resistance you can find a more logical area to enter a trade.
In the figure below I’ve highlighted the early entry range ($77.55 to $81.25). The orange line is an area of resistance, notice several times in the past the price action didn’t move beyond that level.
Shakeout + 3 Example
Here’s a cheatsheet of the shakeout + 3 pattern and how to calculate the entry price.